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The 2020 Amendment to the Electricity Act

The proposed amendment is the correct course to realign challenges being thrown at Electricty and structural reforms to boost investment in the sector.

RAJIV GOYAL TABREZ MALAWAT ANKITA BAFNA and PALLAVI KHANNA

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The power sector in India is predominantly regulated within the paradigm of Electricity Act, 2003 (“Electricity Act”). It was a major policy initiative and reform exercise to consolidate and regulate laws relating to generation, distribution, transmission and trading of electricity within India. Apart from other key features, one of its prominent features was to de-license generation of electricity and distancing government from the exercise of tariff fixation.

One may gather, its success from the fact that currently, India has succeeded in connecting every village to the power grid and generating capacity of India stands at 387 GW which includes 87 GW of RE power leading to only 0.7% of peak hour shortage of power which was 12.7% in FY 2009-10. With the passage of half score and seven years, the need for structural reforms was felt to equip the existing statutory landscape of the Electricity Act particularly in view of –absence of cost reflective tariff, enforcement challenges relating to Power Purchase Agreements (“PPAs”), financial and operational inefficiencies of Distribution Companies (“DISCOMs”).

The said issues appear to have also adversely affected sentiments of businessmen/ industrialists who felt compelled to depart and mark off the electricity sector from their business priorities. Accordingly, the Government of current times while adopting progressive measures to fix the issues, proposed Electricity (Amendment) Bill, 2020 dated April 17, 2020 (“Draft Amendment”).

Key Measures

Coming to finer and minute prints of the Draft Amendment, following are key measures mooted by the Draft Amendment: Draft Amendment seeks to redraw its focus on renewable energy generation by insertion of Section 3A to form a dedicated policy for renewable energy sources which would prescribe percentage for renewable energy and hydro power purchase obligations.

However, it is yet to be seen whether a universal renewable purchase obligation percentage shall be prescribed for all states or necessary leeway like present dispensation, shall be accorded to the states in the National Renewable Energy Policy. Visible thrust on RE and Hydro energy at Central level shall act as a great signal towards overall stand of the Federal Government with a clarity to the sector players who have been looking for unambiguous policy prescription.

Further, high penalties as proposed in terms of Section 142 (2) of the Electricity Act upon obligated entities for seeking compliance of shortfall of purchase target would also lead to strict compliances of the renewable purchase obligations. Draft Amendment has proposed insertion of Section 2 (17A) to pave way for introduction of DSL and amendment in Section 2 (27) of the Electricity Act to modify existing provisions relating to DF.

The suggested changes in the Section 14 of Electricity Act confirms that both DSL and DF are not required to obtain a separate license. For purpose of regulatory and business compliance, DSL is required to taken permission from the Electricity Regulatory Commissions , whereas in relation to DF, mere intimation is required. One may anticipate regulations in future on the said issue, post formalisation of the Draft Amendment, detailing nitty-gritties in relation to qualifications and business operations of DSL and DF.

The new provision for DSL and modifications for DF, along with Direct Subsidy Transfer as proposed in terms of Section 65 of Electricity Act would indeed improve operational and financial efficiencies of DISCOMs. n order to tackle frequent payment defaults by DISCOMs which has pushed several generators to become Non-Performing Assets ) and some are on verge of becoming NPAs, the Draft Amendment has introduced payment security measures.

Vide the Draft Amendment, Regional Load Despatch Centres and State Load Despatch Centres have been statutorily mandated to consider PSM as agreed term between the parties under contract and a pre-condition to scheduling and despatching of electricity. The Draft Amendment has proposed insertion of Section 2(24A) and Section 109A for creation of separate authority for enforcing contracts related to sale, purchase or transmission of electricity, which shall be headed by a Judge of a High Court and vested with the powers similar to a civil court.

It would result in reducing adjudicatory power and functions of ERCs however the overlapping functions of ECEA and ERCs are yet to be tested in practical scenario. The constitution of ECEA would certainly ensure timely and effective enforcement of contracts in enforcement of the Act. Equipped with powers of attachment, sale of property, arrest and detention, ECEA could turn out to be much awaited reform, which is required to succeed in creating a process, deterrence and signal legal principle backed norm that reciprocal terms of PPAs need to be complied strictly, generators ought not to be coerced and PPAs are not subject to renegotiation or re-opening after change of regime.

Apart from above, there are other notable amendments which have been proposed vide the Draft Amendment–

(a) extending applicability of Electricity Act to Jammu and Kashmir and Ladakh which would apart from having benefit of unifying electricity market, shall also assist in optimum utilisation of hydro power of the said territories.

(b) clarity on role of National Load Despatch Centre, which shall lead to functional integration of the grid, safety, security and stability of the grid

(c) deemed tariff adoption in case of delay of more than 60 days by ERCs as proposed under sub-section 2 of Section 63 of the Electricity Act, (d) statutory impetus for promotion of cross border sale of power

(e) cost reflective tariff by removing subsidy aspect from the tariff which would certainly open up option of direct transfer of subsidy to beneficiaries making the tariff true reflection of the actual cost

(f) empowering APTEL with similar powers of a High Court to deal with wilful non-compliance of its orders and directions and to treat the same as contemptuous act. Increasing strength of members at APTEL and bringing uniformity in relation to selection of members of ERC, would certainly make adjudication process expeditious.

Conclusion

The Draft Amendment, as a whole, looks very promising to deal with impending issues and problems that are driving away investment and hampering growth of power sector. The Draft Amendment is a hope in present uncertain times to take measures for deep and wider economic growth. There are certain issues that need more clarity and specifications.

The Draft Amendment in present form is not clear in relation to powers of ECEA and ERCs, particularly addition of word “ ” in Section 79 1(f) and Section 86 (1)(f) which suggest that ERCs will continue to have power to refer to arbitrations, including those issues for which powers are proposed to be vested with ECEA.

In view of the same, clear and unambiguous classification of adjudicatory powers of ERCs and ECEA are required to be undertaken to avoid prolongation of litigation in getting the issue of classification of adjudicatory powers of ECEA and ERCs being finally adjudicated. Such delay might completely take away the essence and benefits of the proposed provisions. Further, PSM mechanism needs to deal with issue of generation of RE power which has “ ” status and get benefit of deemed generation. In terms of the Draft Amendment, maintaining a PSM is condition precedent for scheduling of power.

The RE power cannot stop or control or regulate its scheduling even if there is no PSM on accounts of its nature of power. Such pre-condition of having PSM for scheduling, might not have any benefit to renewable energy sector and which may ultimately lead to unjust enrichment to DISCOMs which might turn and take a stand that scheduling was without a process of law.

In light of the same, there is a need to take measures to plug the gap and to ensure that PSM is being provided to RE generators to safeguard their interest as well. The same becomes much more important for the commercial viability and survival of renewable energy generators who unlike thermal power does not receive generation compensation in form of capacity charges. Another issues that needs modification relates to scope of invoking contempt jurisdiction of APTEL. In present form, the Draft Amendment has restricted initiation of a contempt proceedings to Advocate General or Law officer.

However, it disregards the fact that contempt or non-compliance of APTEL’s orders can also be done by state instrumentalities or government authorities or entities owned by government. In view of the same, suitable modification should be carried out to provide option to private players or any person to initiate contempt proceedings against violation or noncompliance of the APTEL’s order.

Certainly, the Electricity Act has come a long way fulfilling its major economic and social objectives. However, there is much to be done and proposed Draft Amendment is the correct course to realign challenges being thrown at Electricity Act and structural reforms required to boost investment in the sector.

Rajiv Goyal, Principal Consultant, Mercados Energy Markets India Private Limited, Tabrez Malawat & Ankita Bafna, Partner, the Guild, Advocates & Associate Counsel, and Pallavi Khanna, Senior Associate, the Guild, Advocates & Associate Counsel.

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